Federal Health Reform and Stock Market Returns of Health Insurers

June 28, 2011

Perhaps the most dispiriting occurrence during the debate over health reform in 2009 and 2010 was the eagerness with which many business interests in the health sector embraced the federal government takeover of Americans' access to health care, says John R. Graham, director of health studies at the Pacific Research Institute.

The Patient Protection and Affordable Care Act (PPACA) would not have passed without the support of business interests in the health sector. One method to figure out why the business community accepted the PPACA is to compare the stock market returns of for-profit health plans with a broad benchmark and see how those returns reacted to political developments over the past few years.

The annualized return of the Standard & Poor's (S&P) 500 Index from the beginning of June 2008 to the end of May 2011 was minus 1.34 percent versus plus 13.41 percent for the Morgan Stanley Healthcare Payors Index ("HMO").

For the 110 trading days leading up to the 2008 election, HMO significantly underperformed the S&P 500: minus 110 percent versus only minus 76 percent, annualized.

The HMO index's outperformance occurred subsequent to President Obama's election.

During the two years between the two elections (November 2008 and November 2010), the HMO index significantly outperformed the broader S&P index.

Plus 26 percent for the HMO index versus plus 9 percent for the S&P, for an annualized outperformance of 17 percent.

For the period since the 2010 election, HMO has continued to outperform at an even faster rate: 65 percent versus 21 percent, for an annualized outperformance of 44 percent.

Indeed, stock prices of for-profit health plans have significantly outperformed the broader stock market since President Obama's election in 2008, but also since the Republican "wave" of 2010. This indicates that investors believe that PPACA is favorable to health plans, and believe that it will harden into a bipartisan reality.